TOP 10 CHALLENGES FOR INVESTMENT BANKS

Blockchain moves to early adoption

Using distributed ledgers

Blockchain has the potential to improve processes across an investment bank’s operating model and drive significant cost take out. In order to make the best of this technology, banks need to examine their existing operational systems and determine where blockchain could add the most value in the long run.

Source: Accenture/McLagan (a business unit of Aon plc) Study

2016 saw notable advances in blockchain use

More players across the capital markets industry have started using distributed ledger technology in 2016. NASDAQ launched Linq1, a blockchain solution for the issuance, tracking and trading of private equity assets. The Australian Securities Exchange (ASX) is considering blockchain technology to replace its current clearing and settlement system.2 The Depository Trust and Clearing Corporation (DTCC), after successfully testing blockchain technology on trading swaps with four banks earlier in 2016, is currently focused on other asset classes.3

As the pace of adoption picks up, investment banking leaders need to consider the impact of blockchain on business processes, and weigh regulatory obligations.

Blockchain has the potential to reduce operational costs

At the heart of the long term opportunity is the ability for banks to repoint key operational, risk, and finance systems to distributed ledger technology based shared data platforms and decommission large portions of their process and data infrastructure. It will take time and multiple iterations of the platforms to get to that end-state. The potential for material cost and efficiency gains are what is driving the industry's focus and investment.

A recent study by Accenture and McLagan, a business unit of Aon plc, estimates that the average operational cost saving potential of full-scale blockchain adoption across eight of the largest global investment banks could be in the range of 30 percent or more per institution.

There are also potential savings resulting from lower transaction fees paid to exchanges and clearing houses, not to mention lower capital requirements. Through shortened settlement times, optimized security delivery and payments, blockchain could help unlock previously “trapped” capital.

Investment banks need a new operating model

In addition to potential cost reduction, blockchain technology could also create a framework for new products and services, and help improve processes across the operating model of investment banks.

Industry leaders need to develop a clear plan of action for the transition period during which legacy infrastructure and distributed-ledger models could coexist. Blockchain will have an impact on human capital as well, requiring a workforce with new expertise and skills. Middle- and back-office functions could change profoundly, while computing power needs increase.

What is the regulatory response to blockchain?

Central banks4 and regulators5 have expressed optimism about blockchain-enabled distributed ledger technology. From a banks’ perspective, blockchain’s use of analytics and visualization tools could make regulatory reporting more efficient and reliable. For regulators, blockchain could provide direct access to data for regular monitoring.

However, there remains an uncertainty on new standards, rules, and governance for the use of blockchain in the industry. Given the lack of best-practice guidance from regulators, banks should ensure that the blockchain-enabled solutions comply with all current regulatory mandates, even if certain rules seem unnecessary or redundant.

Next steps

Consider replacing existing infrastructure.

Have a clear vision in place for how blockchain and distributed ledger technologies can improve processes, over both short- and long-term.

Create a working group to study the new technologies, understand their possibilities and the benefits of implementation.

Identify the highest priority processes to explore feasibility and readiness.

Implement processes for developing and testing prototypes.

Be aware of the regulatory and legislative environment.

Conclusion

As the industry moves to the next phase of distributed ledger technology and blockchain adoption, investment banks might see a shift in the business processes and the current operating model.

While blockchain holds great promise for cost reduction and creation of new products and services, this new technology is not a panacea. It could improve some processes, but not all.

Investment banks planning to leverage blockchain need to identify which processes could benefit the most from adoption, and have a bold vision and practical plan in place for technology needs, human capital changes and regulatory demands.

Challenge Highlights

Blockchain could help investment banks not only reduce costs, but also create new products and services. The question is how.

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